The Risks of Personally Co-Signing a Business Debt

Did you know that if you personally co-sign a business credit account in Alberta, you could be responsible for your company’s debt?

This is possible even with the protections set out in Alberta’s Guarantees Acknowledgement Act (GAA) which (among other things) requires a personal guarantee to be certified by a lawyer.

Creditors can skirt the GAA with carefully crafted co-signatory language. A distinction is drawn between guarantee language and co-signatory language. The protections contained in the GAA apply to personal guarantors but not to personal co-signatories.

When a business becomes insolvent, creditors can enforce financial obligations as against a co-signatory to a credit agreement. Co-signatory language may be buried in a credit application, so it is important to know how to spot co-signing language, ask clarifying questions, and manage risks as needed.

What should you look for in the credit agreement?

  • language that indicates that you are personally liable for the debt along with the company
  • any indication that you will pay the debt irrespective of the company’s obligation to pay the debt
  • any indication that you are signing in a “personal capacity”
  • any indication that you are a “co-customer” or “co-signatory” – this could be set out anywhere in the agreement, like a preamble or signature line
  • phrases like “jointly and severally liable with the company” and “agree to co-sign and be responsible for the debt”

The onus is on the co-signatory to understand and inquire about the implications of the agreement: creditors are not required to advise the co-signatory of the legal implications of the credit agreement.

Multiple individuals to a company may sign a credit agreement, often for the purpose of accessing the company’s credit. If the language aligns with the principles above, it is possible that the creditor could enforce against any or all of the signing parties for the full amount of the company’s debt.

Co-signatories can be proactive when evaluating a credit application.

Confirm the nature of the agreement and its terms before signing. Make sure to review any credit agreements that your employees may want to sign; create a protocol in this regard. Finally, seek legal advice if you are unsure whether a credit agreement could cause you or your employees to be personally liable for your company’s debts.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.